The Future of Service Business: Electric Motor Service Providers
When asked to consider the future it’s always good to start in the past. When asked about service it sometimes makes sense to start with products.So, let’s first look at “pivotal” products. These are innovations that, as the name implies, induce pivots or radical shifts in direction, in the way the world works. There have been many such products throughout history, most of them recognised after the fact. One was undoubtedly the printing machine, others were the steam engine, the cotton gin or the light bulb. The reason such products create radical disruptive change is that they make things which were previously very expensive suddenly cheap enough to be affordable.
This reduction in cost creates massive demand, which, in turn, leads to huge growth rates.
For example, prior to the printing machine, books were written by hand. It took 208 days’ worth of average wages to produce a book in the late 14th century. After the printing machine, by the early 17th century, producing a book fell to 0.17 days of average wages, a decline of 1200 times! Demand exploded, and book production went from the hundreds or low thousands a year to the millions and then tens of millions. Books changed the world of course because information could be stored and accessed at scale. Another pivotal product, the light bulb, further increased the demand for books.
At the time of Edison’s invention (artificial) light produced by candles and oil lamps was unaffordable for reading purposes for most people. Afterwards however, the cost (in terms of $/lumen-hour, a standard measurement for light) fell by 400 times. It not only became possible for everybody to afford to read, work and study in the evening or at night. It also enabled schools, hospitals and factories to become more productive, which previously would have been too expensive to light up.
Historically, the light bulb changed the world, in our modern world, so have products like the internet or, particularly, the iPhone (and not necessarily only for the obvious reasons as we’ll see below).
Let’s go back to the 1880s. This was the time Tesla’s electric motor was introduced, and it too was a pivotal product. At the time, the prime movers in factories and industrial plants were steam engines rotating huge shafts to which all the plant machinery was attached. If the engine broke down all production stopped. Expanding production was difficult, in many cases impossible, and it always had to be in proximity to a coal mine or to a port where coal could be transported.
The electric motor changed all that. Not only was it hugely more energy efficient than steam engines, it was also cheap enough to attach to groups of machines first (group drives) and then to individual machines (unit drives). It reduced the risks of production stoppages, and it enabled the optimisation of factory layouts and new forms of techno-managerial organisation. It also allowed easy expansion of production by adding individual machines, instead of building completely new facilities. In this way the motor made manufacturing far cheaper and more flexible, thereby driving industrialisation.
In the early 1900s utilities started offering motors (inclusive of service) for free to customers who would buy electricity from them. By the 1920s electricity and motors were the dominant drive in a rapidly expanding manufacturing industry. Industrialisation was also supported by two other key ideas. One was interchangeable parts and components through standardisation, so that a part could fit into any number of products. Originally a demand by governments for weapons, it drove the machine tool industry, which produced the necessary machines for manufacturing. The other was the idea of fast repair service and maintenance. Ford’s assembly line would not have been possible without it - too much downtime would have killed it. So electric motors, interchangeable parts and fast repair service enabled rapid industrialisation as well as consistently high GDP growth rates - changing the world in the process.
As good as the motor was for the manufacturing industry, it didn’t succeed in mobility. Weak battery technology at the time ensured that the electric motor virtually disappeared from vehicles by the early 1930s, replaced by the internal combustion engine (ICE). And the ICE had a great run until it ran afoul of its own success, producing too much local pollution and becoming a major contributor to global warming.
In 1990, California passed the Zero Emission Vehicle Program which heralded the re-emergence of the electric vehicle (EV), slowly at first, much faster later as other jurisdictions followed suit with regulations. Recent progress in battery technology allows modern passenger EVs to have ranges of over 350 miles at a reasonable cost. It took five years to sell the first one million electric vehicles, but only six months to sell the latest million, and the trend is accelerating. There are close to five million EVs on the roads globally right now. Analysts believe that by 2025 EVs will claim a 15% share (up to 30% in Europe) of new sales and expect up to 150 million EVs on the road by 2030.
The electric motor is therefore making a big comeback. Of the 2.5 billion motors in the world today, roughly 10% are medium sized motors (0.75 – 375 kW) consuming approximately 35% of global electricity production. EVs mean that that number will increase drastically and quickly. It is no wonder that the funds flowing into electric motor R&D have vastly increased recently to improve not only energy efficiency, but also performance and durability and reduce weight, size and cost. Going further, the first versions of electric trucks, ships and passenger carrying helicopters, even airplanes (experimental) are already in operation. This will have an impact on industrial applications as well. Through the increasingly powerful combination of the electric motor and battery, the industrial and mobility worlds are converging.
While electric vehicles are here, the automotive industry is in many ways not prepared for them. For example, the industry’s business model relies mainly on the after-market for its profits, as do the dealer networks. Vehicles with electric powertrains require far less maintenance: They have 80% less moving parts and require no oil and filter checks, and have no radiation fluids, transmission, drive belts, air and fuel filters or spark plugs. A study done in the US showed the Tesla Model S to be on average 80% cheaper to maintain than comparable ICE limousines by Mercedes and Ford, when travelling over 600,000 miles. The electric car will significantly disrupt the automotive industry and its distribution/service model. In addition, most, if not all, car dealers lack the electrical competence to service EVs. Resources will not be easy to find, and training will be expensive.
Some forward-thinking OEMs are addressing this issue by eliminating the dealer network altogether. Tesla, for example, is bringing all maintenance in-house (including apparently bodywork) and is in the process of additionally hiring 1400 technicians, deploying 350 service vans (to go to customers to fix their problem) and setting up 100 new service centres in the US alone. Furthermore, it is deploying advanced technology to support remote diagnostics. According to Elon Musk, the system will be able to place the origin of a problem via a customer’s phone through acoustic signalling and triangulation. More OEMs are bound to go down that route, though changing legacy distribution and service structures will be difficult and expensive.
This brings us back to manufacturing and industry. During industrialisation and up to the 1970s and ‘80s, most B2B manufacturers saw service as a support function, a necessary evil to support the growth of product sales. For example, ABB reportedly set-up its electric motor repair shop network in the 1980s, not because it was particularly interested in service, but because repair, as it was done in the motor factories, was disturbing their production flows.
Many OEMs therefore encouraged and supported the setting up of independent service providers for their products. However, economies matured, growth slowed and in the 1990s companies discovered that installed bases were now much greater than annual product sales. It was at that time, spurred on also by consultants and academics, that companies started to focus on service, not only as a support for product sales, but as a business and a source of growth.
Initially companies focussed on support logistics to minimise downtimes for customers, as spare parts continue to be a disproportionate contributor to bottom lines. This expanded to knowledge-based support, as it was recognised that it’s better to avoid downtimes altogether. Techniques such as condition monitoring (e.g. vibration analysis) became available on computers at the time and were then integrated into automation platforms. Service became strategically more important, to differentiate from competitors, and lock customers in for the longer term.
Some companies created dedicated service business units, operating globally across all brands and products. Many suppliers of large complex systems expanded their scope outside their own installed base and began to provide service for competitor products. Others moved on to “performance contracting”, in effect supplying not the product or system, but rather its utility and taking the risk for the product performing well (according to specifications) far beyond the warranty.
The most well-known example of this is Rolls Royce’s “power-by-the-hour” concept for jet engines, where the customer pays for “thrust” rather than the engine with Rolls Royce providing all the support required to ensure that thrust is available where and when required. Such models can now be found in many industries, including power generation, oil and gas, or pulp and paper. Variations can also be found on subsystems or assets within a plant, such as ABB’s Total Motor Management. Early in the 2000’s, ABB decided to take responsibility for the performance of a customer’s entire motor fleet, often hundreds, even thousands of motors, of all types and brands - against a risk-based fee.
Such contracts certainly risky. It was difficult to accurately assess the probability of failure over long periods, and therefore the cost of repairs and maintenance of the machines. Often companies tried to minimise the risks through exclusion clauses in contracts or high margins. Usually making them unattractive to customers. Condition monitoring was expensive because it required a highly skilled work force for the analysis of every additional customer or additional product.
All this started to change from the 2010s - due to the pivotal product we mentioned at the beginning of this article, the iPhone. Apart from changing communication and photography and creating an addiction for social media, the iPhone enabled and drove miniaturisation, sensing and the necessity to store, transfer and manage Big (i.e. huge!) Data volumes. It thus set the stage for what we now call the Internet of Things, Analytics, Data Science, Machine Learning and Artificial Intelligence.
These now play an increasingly important role in industry’s service and maintenance. Early applications, such as Augmented Reality (AR), can connect experienced service engineers with machine users remotely to help diagnose and rectify problems, significantly reducing waiting and downtimes as well as eliminating travel time and cost. Sensor data can appear in an engineer’s field of view overlaying the machine in real time, allowing faster and more accurate diagnostics.
Predictive maintenance through artificial intelligence (AI) or machine-learning can indicate the remaining useful life of equipment, and the probability of failure. Based on the build-up of historic data, the technology allows users to avoid failures and plan for periodic (preventative) maintenance. Effectively, it automates condition monitoring, allowing service vendors to significantly eliminate risk from performance-based contracts, while improving productivity for customers at the same time. Consequently, more and more OEMs are moving into this model of service offering.
There is also another reason. Through its systems, Tesla is currently collecting huge amounts of data on its cars, especially on the performance of its autopilot. It believes this data will help it not only improve its cars, but also give it the edge in the current holy grail of the automotive industry; autonomous vehicles.
Similarly, machine manufacturers recognised the need to stay close to their products after selling them. More specifically to their data: not only may it help with improvements and innovations, but it may also be that the knowledge acquired through the it, will be more valuable than the machine itself. For example, predicating a maintenance intervention or recognising how to optimise production.
With the advent of EVs and autonomous driving, car dealers will come under pressure from changing OEMs, just as technology will drive competitive behaviour from OEMs in the industrial motor services, therefore putting pressure on independent service providers. Lower prices and loss of business may be the result. Let’s not forget that successful predictive maintenance means like-for-like reductions in repair volumes.
Since independent service providers, particularly for electric motors, are commonly smaller local companies, what should they do?
Right now, the emerging changes make for a fuzzy future. Certainly, service providers for electric motors face both challenges and opportunities. On the one hand through the electrification of mobility and on the other the increasing convergence of industrial and automotive technologies. These companies are looking at a greatly expanded market, while at the same time the previous natural players in this market (car dealers) are facing not only declining service volumes (and therefore declining sources of revenue), but also a lack of skills in electro-technologies.
As more and more industrial companies commit to intermittent renewable energies, such as wind and solar power, new asset classes and markets open, including power chargers and energy storage. These can provide opportunities for entrepreneurial service companies to cover the whole ecosystem surrounding the motor, not just the rotating systems. An interesting new market could be re-purposing batteries from mobile to stationary applications within the context of the circular economy.
The challenges are driven by technology, but technology may also help find solutions: For starters it opens up the ability to share things in multiple ways such as data from entire facilities, standards, expertise, as well as market and sales data. This helps companies to not only get better access to the market, but also improve operations and reduce costs, freeing up resources for investment.
Platform applications, such as Airbnb and Uber are well known from B2C markets, but a number have emerged in B2B markets as well. Crucially, data is the key opportunity, not so much for individual service companies, but for companies acting together collaboratively.
Collectively, small independent service providers hold more data collectively than individual OEMs, even the big ones! Including data on plant machinery, types of facility, brands of motors, other assets, and operating conditions. This collective data may prove very valuable, whether monetised through direct sales to data brokers or used elsewhere. The data could be used to develop predictive maintenance applications or, more importantly, something new altogether. Future applications will help improve customer operations, de-risk contracts, and improve company sales and margins.
It won’t be easy to do and it will require significant collaboration and discipline by companies that are perhaps not so used to operating in this way. It is possible though, and it could well be worth it. Collaborating to compete may well turn out to be the right way for the future of this service business and will probably open up exciting new business concepts made possible by those astonishing pivotal products: the internet and the smartphone.